Proposed New
Rules on the Provision of Personal Services

This
summary for use as a basis for discussion but is not a consultation document.

This
summary should not be taken as indicative of the form new rules might
eventually take and is not to be relied upon in individual circumstances
where the underlying facts may differ.

The purpose of the
proposed new rules is to remove opportunities for the avoidance of tax
and Class 1 national insurance contributions (NICs) which can arise
where an engagement is routed through an intermediary (or intermediaries).
The changes are not designed to prevent a worker providing his or her
services through a third party but, where the arrangements amount to disguised
employment, they should remove any tax/NICs advantages of doing so.

This note sets out
proposed new rules. The proposals can be split into three parts:

Part 1 identifies
the engagements caught by the new rules;

Part 2 sets
out how tax and NICs will be charged where the new rules apply;

Part 3 deals
with cases where the new rules are not properly applied.

1) Identifying
engagements where the new rules will apply

It is proposed that
the new rules will:

· apply where:

- a worker
holds an office with or performs services for another person ('the
client') where the client has a right of supervision, direction or
control as to the tasks undertaken or the manner in which they are
performed and

- the worker
or services are provided under a contract between the client and an
intermediary (e.g. a service company or a partnership of which the
worker is a member);

· not apply
where:

- a worker's
services are supplied incidentally to the supply of materials and/or
equipment (e.g. where a lorry and driver are supplied together),

- where the
client is an individual not in business (i.e. services for a householder
should not be affected) or

- an engagement
is 'exempt' (see below).

The aim is to minimise
any impact on those not involved in avoidance. It is proposed, in general
terms, that payments by a client to an intermediary with respect to a
particular engagement should be exempt from the new rules - provided that

any remuneration
by the intermediary with respect to that engagement will be in a form
subject to tax and NICs and

the intermediary
will itself account fully for PAYE and national insurance.

It would be inappropriate
and burdensome to require a client to check that the intermediary had
in practice done this. What is required is a system to allow clients,
or potential clients, to check (quickly, easily and at minimum cost) whether
or not they can make payments gross.

The favoured approach
is a certification scheme. In broad terms, an intermediary undertaking
to pay workers only in a form chargeable under Schedule E and subject
to national insurance should be able to apply to be what we will describe
as certified agency. The use here of the term agency
is perhaps a little misleading. While we would expect all existing agencies
to apply for certification, there would be no need to restrict certification
to bodies which are employment agencies in the traditional sense. At this
stage, there seems no reason not to allow any intermediary who accounts
for PAYE and NICs to apply for certification.

The idea is that
the Inland Revenue would maintain a constantly updated public register
of certified agencies incorporating instant access and a helpline facility.
The certification process itself should obviously be as quick and simple
as possible - ideally something very much akin to self-certification.
To allow such an approach to operate effectively, ease of certification
would need to be accompanied by appropriate penalties for wrongly obtaining,
or using, certification.

2) Tax and NICs
treatment where the new rules apply

Again in very broad
terms, the idea is that where a particular engagement comes within the
terms of the legislation and payment made is not covered by the exemption,
the worker will (for the purposes of tax and NICs only) be deemed to be
an employee of the client. The tax and NICs liabilities of the client,
intermediary and worker would be dealt with as follows:

The client

The client will
account for PAYE/NIC on relevant payments made to the intermediary or
to the worker - broadly following existing PAYE/NICs rules.

The intermediary

a) Intermediaries
who are companies

Gross receipts from
the client will be treated as taxable receipts of the company in the normal
way. Income tax deducted by the client under PAYE and primary Class 1
NICs will be allowed as deduction in computing the companys profits.

In this way, the
intermediary need pay no Corporation Tax on the receipts provided the
net amount received is paid out to workers as salary - because
the salary and the tax/NICs deducted will all qualify as deductions in
computing profits for Corporation Tax purposes.

b) Intermediaries
who are partnerships where the worker is a partner

The partnership will
exclude amounts received net of tax/NICs when calculating profits. This
will mean that the partners pay no Schedule D tax or Class 1
national insurance on the income.

c) Other
intermediaries

We expect most intermediaries
to become certified agencies. Where they do not, gross receipts from the
client will be treated as taxable receipts of the business in the normal
way. Income tax deducted by the client under PAYE and Class 1 primary
NICs will be allowed as deduction in computing the profits of the business.

The worker

will be subject
to tax (Schedule E) and national insurance (primary Class 1)
on remuneration from the deemed employment (both accounted for by the
client);

will be able to
deduct expenses allowable under the general Schedule E rules;

will be able to
receive salary tax/NIC free from an intermediary (within a fixed time
limit) - up to the amount of net of PAYE/NIC payments received by the
intermediary.

3) Failure cases

There will clearly
be a need for measures to deal with those cases where a client fails to
deduct PAYE/NIC in a case where no certification exemption is claimed.
However, it does not seem appropriate for this to necessitate the unwinding
of what has subsequently happened within the intermediary nor for the
worker to be chargeable on these sums as income from the deemed
employment. The intention is that the client (rather than the intermediary
or worker) would be held to account in such cases. As described previously,
the intermediary (rather than the client) would be held to account where
certification is wrongly obtained and/or used.